Breaking Down Each Component

Principal (P): the portion of each payment that reduces your loan balance. In early payments, this is a small percentage of the total (see: amortization). On a $400,000 loan at 6.5%, month 1 principal: $362. Interest (I): the lender's fee for the loan, calculated on the outstanding balance. Month 1 interest: $2,167 on a $400K/6.5% loan. Taxes (T): your annual property tax bill divided by 12. Your servicer collects this monthly and holds it in an escrow account, then pays the tax bill when due (typically once or twice a year). Property taxes vary widely: $150/month in a low-tax state vs $600–$1,000+/month in a high-tax state or high-value property. Insurance (I): your annual homeowners insurance premium divided by 12. Like taxes, the servicer collects this monthly and pays the annual premium from escrow. Florida average: $200–$500+/month. National average: approximately $100/month. If your down payment is less than 20%, PITI also includes PMI (Private Mortgage Insurance) — typically $50–$250/month depending on the loan amount and credit score. Some lenders show this separately; others bundle it into the PITI payment.

Why PITI Matters More Than P+I

When buyers ask "what can I afford?" they often think about the P+I payment shown in a mortgage calculator. Lenders think about PITI. DTI is calculated using PITI, not just P+I. A buyer pre-approved for a $400,000 mortgage based on a $2,529 P+I payment may discover that the actual PITI on a specific property is $3,300+ when taxes and insurance are factored in. If that $3,300 exceeds the DTI limit, the loan may not be approved for that specific property even with a pre-approval for the loan amount. Real example: • Gross monthly income: $9,000 • DTI limit: 43% • Maximum monthly housing payment: $3,870 (43% of $9,000) • Other debts: $600/month • Maximum PITI: $3,270 ($3,870 − $600) • P+I on $400K at 6.5%: $2,529 • Property taxes + insurance: $800/month • Total PITI: $3,329 — just barely over the limit The buyer might be pre-approved for the loan amount but denied for the specific property because the local tax rate pushed PITI over the DTI threshold.

Escrow: Where Taxes and Insurance Payments Go

Most lenders require an escrow account for first-time buyers and buyers with less than 20% down. Even for buyers who could opt out, escrow protects both parties: the lender ensures taxes and insurance are always paid (protecting their collateral), and the homeowner avoids the stress of large annual lump-sum bills. How it works: each month, the servicer collects 1/12 of the annual tax and insurance amounts alongside your P+I payment. This money accumulates in the escrow account. When the annual tax bill arrives or insurance renews, the servicer pays directly from escrow. Escrow accounts are reconciled annually. If taxes or insurance increased, the servicer adjusts your monthly collection to maintain an adequate balance. This is why PITI payments can increase even with a fixed-rate mortgage — the P+I never changes, but the T and I components adjust as tax assessments and insurance premiums change.

“The gap between P+I and PITI is the source of one of the most common budget surprises for first-time buyers. I require every buyer to get an actual property tax estimate (from the county assessor's website for the specific property) and an actual insurance quote before we calculate their PITI budget. The difference between a $150/month property tax county and a $550/month county can be $4,800/year on identical homes. That is a material difference in affordability that does not show up in a simple mortgage calculator.”

— Ryan Brown, Principal Broker & CEO, Own Luxury Homes®

• All Definitions
• Escrow
• Closing
• Contingency
• Pre-Approval
• DTI
• Amortization
• Underwriting

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